Transportation Management: How to Fight The High Cost Of Moving Freight

Sept. 27, 2006
Transportation and warehousing cost U.S. companies more than $1 trillion in 2005, and the price tag continues to rise.

Historians might well point to 2005 as the year that supply chain management came of age, but that distinction has nothing to do with the increasing sophistication of the tools or a wholesale agreement that performance metrics matter. It was 2005 when transportation costs rose 15.2%, to $583 billion. The amount spent on diesel fuel alone in the U.S. jumped from $65.9 billion in 2004 to $87.7 billion in 2005 -- a huge 33% increase.

Supply chain professionals at manufacturing companies large and small are trying to compensate by adopting strategies that will help reduce their logistics spending, or at least keep their costs under control. The total logistics cost in the U.S. last year was $1.1 trillion, or 9.5% of the current gross domestic product.

If current projections hold, diesel fuel will cost the U.S. trucking industry $94 billion in 2006, a somewhat more modest 7% increase. Those costs, of course, end up being passed along one way or another to the manufacturers and the retailers who hire those trucks.

According to transportation consultant Rosalyn Wilson, who prepares the annual State of Logistics Report for the Council of Supply Chain Management Professionals, the task of managing a company's supply chain has become more critical than ever because the growth in business logistics costs in the U.S. has been unparalleled over the past year. "Given still-soaring fuel costs, continued capacity pressures, record levels of truck driver shortages and turnover, and the expected costs of meeting security requirements, logistics costs have continued to rise into the first several quarters of 2006," Wilson notes.

What A Trillion Dollars Can Buy

Warehousing And Inventory Costs
(all amounts in billions)
Taxes, Obsolescence, Depreciation, Insurance 245
Warehousing 90
Interest 58
Subtotal 393
Transportation Costs
Motor Carriers 583
Railroads 48
Air 40
Water 34
Freight Forwarders 22
Oil Pipelines 9
Subtotal 736
Administrative and Shipper-related Costs 54
Total Logistics Cost 1,183
Capacity pressures aren't always a bad thing, as they imply that there are more companies looking for transportation providers than there are vehicles to carry all that stuff. Indeed, as Wilson points out, freight volumes climbed higher in 2005 than ever before, and that's not just due to cheap goods made overseas coming into the U.S. According to Wilson, domestic freight transportation has grown more than 20% over the past 10 years and could grow another 65% to 70% by 2020. "Growth in international shipments is predicted to outpace the expansion in domestic shipments," she adds, possibly by as much as 85% over the same period.

The downside to that growth, however, is the severe strain it's putting on our transportation infrastructure. "The increase in international trade has placed mounting pressure on the initial points of entry -- the gateways, ports, airports and border crossings -- creating bottlenecks for the movement of freight," Wilson cautions. In addition, "the successful movement of freight is very dependent on what happens beyond the ports along the nation's highways, inland waterways, railroads, warehouses and distribution centers, container yards and terminal facilities.

See Also

Strategies On Becoming A Carrier's Preferred Customer
She recommends that companies invest in the following bottleneck-clearing strategies:
  • Improvements in highway and rail port connectors
  • More dedicated freight corridors with grade separations or truck-only lanes
  • Become more efficient in the use of terminals and freight hubs
  • Relocate and diversify distribution centers
  • Encourage the use of alternative landing points
  • Build up the local infrastructure.

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